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This question was created from CH7_ Corp acquisitions and reorgs Problems_Spring2016(1) (1)


Spill-Oil - Farelit Corpofdoll lids Deell Ili Life business Of filafluidCturing dlid selling
trucks for the past eight years. Its subsidiary, Diesel Corporation, has been in the business
of manufacturing and selling diesel engines for the past seven years. Parent acquired
control of Diesel six years ago when it purchased 100% of its single class of stock from
Large Corporation. A federal court has ordered Parent to divest itself of Diesel pursuant
to an antitrust ruling. Consequently, Parent distributes all its Diesel stock to its
shareholders. Alan owns less than 1% of Parent's outstanding stock having a $40,000
basis. As a result of Parent's distribution, he receives 25 shares of Diesel stock having a
$25,000 FMV. Parent distributes no cash or other assets. Parent's E&P at the end of the
year in which the spinoff occurs is $2.5 million. The Parent stock held by Alan has a
$75,000 FMV immediately after the distribution.
a. What are the amount and character of the gain, loss, or income Alan must
recognize as a result of Parent's distributing the Diesel stock?
b. What basis does Alan take in the Diesel stock he receives?
C. When does Alan's holding period for the Diesel stock begin?
d. What amount and character of gain or loss does Parent recognize on the
e. How would your answer to Part a change if Parent had been in the truck business
for only three years before the distribution, and it had acquired the Diesel stock in
a taxable transaction only two years ago?

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